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Opinion Editoral: Ontario Liberals must fix hydro quick

By George Vegh, National Post
October 20, 2003

Few areas of public policy in Ontario are more fraught with danger than energy. However, the issues around supply, transmission and pricing of power will not go away and, given the four-year political cycle, the new government will inevitably need to make hard decisions soon.

The new Liberal government must address five key issues:

The 4.3�/kWh price cap: Last year, the government bought power at an average price of 6.2�/kWh and sold it at 4.3�/kWh, losing 1.9� for each kilowatt hour provided under the price cap. Applied across all customers who received the capped price, the total cost of this was about $1.5-billion. If the new Liberal government determines that this money would be better spent on health or education, it needs to unwind the price cap. The current schedule would remove the price cap in 2006 -- one year before the next election. To manage an inevitable backlash, it had better approach this gradually and soon.

Market power in generation: Even prior to the price cap, companies weren't investing in new generation because of the market power of the incumbent utility, Ontario Power Generation (OPG), which still controls about 70% of power sold in Ontario. Because the Liberals are committed to keeping OPG in public hands, it needs some method other than disposition. This could include breaking up OPG into a number of smaller units, or encouraging leases, public/private partnerships or other arrangements that mitigate OPG's market power.

Transmission needs: Under a medium-growth scenario, Ontario will max out its access to internal and external supplies (including imports) by about 2009. Things will be especially tight in the Greater Toronto Area, where the government's Independent Market Operator said "significant transmission reinforcement" is necessary to maintain "an acceptable level of supply reliability." However, the government has frozen transmission and distribution rates, leading to a shortage of funds available to build this infrastructure. The new government has to consider what resources to direct at building further transmission. Equally importantly, it should encourage innovative ways to invest in infrastructure that does not require expanding the transmission network. This could include decentralized solutions such as distributed generation that is closer to load and allowing customers to use non-Hydro One contractors to build connections to the network.

Environmentally responsible electricity generation: About 25% of Ontario's current electricity supply is from coal-fired generation. Although the overall emission level has to be reduced, it is not realistic to expect all coal fired generation to be replaced by alternative fuels within the next 10 years. There are simply not enough gas, wind or hydro resources available. The new government has to determine the emission levels it wants to meet and then be open to a number of ways to advance those targets, including tighter emissions controls and a more effective emissions trading system.

An effective and independent regulator: Like every other jurisdiction in North America, Ontario has an independent tribunal whose job is to implement the government's policy in a fair and even handed manner. Like every other provincial institution in the last 18 months, the Ontario Energy Board has not always performed at its best. Perhaps for this reason, the government has become actively involved in day-to-day decision making. This has to stop for the industry and the public to have confidence that the board's decision-making process will be free from political interference. The board's new chairman, Howard Wetston, has the confidence of the community from his experience as a regulator and his reputation as a respected public servant. The new government will have to find a way to take advantage of the board's new goodwill so that it can be re-established as an effective and independent regulator.